If you’re buying or selling a business – or need a valuation for investment or insurance purposes – you’ll need to weigh the value of any business assets in your calculations.
Naturally, many factors will affect business valuation, not least the thorny issue of how much a buyer is prepared to pay in the prevailing market but totting up its tangible and intangible assets will at least provide a starting point for negotiations.
It’s worth bearing in mind that an asset-based valuation is likely to produce the lowest value for a business as it doesn’t take into account any ‘goodwill’ premium that may contribute to its market value. Businesses with significant tangible assets – like real estate – are often valued using this method, especially if the business itself is under-performing or trading at a loss.
Tangible assets include cash, land, buildings, equipment and inventory. The net book value (NBV) of assets should be up to date and take account of any changes in value or the depreciation of assets like machinery which may have to be sold at a discount. It’s important to be realistic about the value of assets – just because you paid £10K for a bespoke piece of signage, doesn’t mean it adds £10K-worth of value to the business.
Intangible assets include non-physical considerations that add commercial value or provide a competitive advantage, such as intellectual property – copyrights, patents, trademarks and the like, but excluding goodwill. Their value can be hard to determine but you could look at the estimated cost of acquiring new assets or estimate the value of income earned from the asset. Only list intangible assets on the balance sheet if they have an identifiable value – assets developed internally (like a software system) may not have a reportable value. Consider seeking professional advice if there’s a lot to review.
Once you’ve determined the value of your assets, simply subtract any liabilities to get to your final figure. If you’re valuing to sell or buy, it’s usual to employ a range of valuation methods including a multiple of profits or discounted cash flow approach to arrive at the fairest price, but an asset valuation is a good place to start and will get the ball rolling.